Friday, December 14, 2012

Concentrated benefits and dispersed costs

I know, that's the most exciting headline you've ever seen on this blog. But it's also one of the most important dynamics in American politics and economics, and it's one that dominates just about everything that comes out of Washington these days. Thanks to Alex Tabarrok of the Marginal Revolution blog, we've got a nice video that explains what it's all about, focusing on why there's corn syrup instead of sugar in our Coke bottles.

Simply put, the people (farmers) who want there to be corn syrup instead of sugar in our Coke have more to gain (or lose) than the rest of us, so they make the most noise, donate the most money, and generally spend the most time and effort making sure that the laws of the land are written in a way that benefits them, even if it's at the expense of the greater good. The rest of us tend not to have enough of a dog in the fight, so we generally won't take the time to fight back, even if we're aware of the issue at hand (which we often are not). The problem is, sooner or later these little things start to add up in a way that matters significantly to us, but only in aggregate.

This video also provides a valuable lesson on the typical behavior of large companies in response to changes in input cost structure. When one input in the product they create increases dramatically in price, these companies are typically very resourceful at finding ways to replace that input at a lower cost (but similar enough quality). That's how we end up with corn syrup in absolutely every food in the grocery store, that's how all of our manufacturing jobs get outsourced to China and Vietnam (no, it's not about "currency manipulation"), and it's also one of the primary factors holding our official "inflation rate" in check.

Inflation rates are only useful statistics if we assume that the goods we're measuring are 100% the same over time, which they rarely are. Coke is different now than it was 30 years ago (and frankly, even five years ago), and so too are cars, houses, clothing, electronics, and more. That's usually a good thing, but not always. "Low inflation" is not a win for us as consumers if it means that the quality of our products is degrading over time—unfortunately, that's exactly what's been happening right under our noses, with a huge assist from government policies.

Concentrated benefits and dispersed costs—it's great when you're the focus of the concentration, not so great when you're the one bearing the costs... and when those small dispersed costs start piling up, it starts to become a pretty big cost, doesn't it?